The very real chief economist, Dr. Eyjólfur Guðmundsson, of the virtual online game EVE has released his first quarterly economic report based on game data. I can imagine it was quite a task to organise economic data from the game and analyse it, so this first report is not so ambitious and concentrates on basic statistics about game players and activities, as well as a few macroeconomic indicators. It also has the coolest pictures that I’ve ever seen in an economic report.

As basic as the analysis is, there are still quite a few interesting things. For example, the distribution of wealth as measured by the amount of game currency that players are holding is skewed, although not as dramatically as distributions of wealth can be in the real world. Second, and very surprisingly, over time there seems to have been both an increase in the quantity of game currency in circulation and deflation. I’m not a macroeconomist, but I thought increasing money supply is usually associated with inflation rather than deflation. The report presents various price indexes and the deflation has been huge - over 50% a year in some cases - while the quantity of money has increased more slowly but steadily.

Of course, the in-game economy doesn’t look like a real world economy in many respects, because it’s just a game and there’s a limit to the amount of realism that can be simulated. So the big question for me is, what aspect(s) of the game’s design have lead to breaking the relationship between increasing money supply and inflation? This could help us to understand the conditions in the real world responsible for that link. I’m also curious about what effect the massive deflation has had on the game’s economy. When prices overall are falling, this induces people to hold onto money rather than spending it, because money increases in value over time. This depresses economic activity, as people just sit on their cash rather than using it for transactions. With such significant deflation occurring, I would have thought that this would cause severe economic problems, and it would be interesting to examine that.

Aside from macroeconomics, I can think of many other microeconomic questions that would be interesting to look at. For example, are there any impediments to trade (eg asymmetric information, externalities etc) and if so how do the game players overcome these? Or do players make contracts with each other and how are these contracts organised? Have spontaneous markets emerged for things like futures and options? Is there a credit market and if so how is it organised? And so on … With so many interesting things to look at, and so much good data, Dr. Guðmundsson is a really lucky guy!

As I’ve mentioned before, the online game EVE has hired a professional economist to look after its in-game economy. The EVE game has about 200,000 active (paying) subscribers. I don’t play it myself but it seems to be a sci-fi strategy game based on trading and space warfare. Their economist has recently written his first blog post analysing some of the vast amounts of basic economic data that the game generates. He concentrates on activity in the game’s markets for ‘minerals’ which I presume are used in the production of spaceships and other things in the game.

The analysis proves that, as always, the laws of demand and supply work, even in online fantasy games. For example this graph shows the prices of two of the game’s “minerals” over time:

As their economist explains, the price of zydrine fell over time as greater supply was released into the game environment, while in recent times a steady supply of megacyte combined with increased demand have lead to increased prices.

The EVE economist promises a quarterly economic report where he looks at other macroeconomic indicators like growth and inflation. The game seems to have a natural rate of growth due to new players entering, which is similar to population growth in the real world. Unlike the real world, however, the supply of other resources (eg minerals) seems to be controlled by the people who run the game. I guess it’s necessary to gradually increase the supply of resources over time otherwise if the quantity was fixed at the beginning then those who got in early may have had an unfair advantage in accumulating resources (ie wealth) over others. Such an uneven distribution of wealth is indeed observed in the real world, but the game’s objective is to make money for its creators I guess, and you’re not going to get a lot of players if only the early players have all the success. So they have an incentive to generate a more even distribution of wealth by introducing new resources over time that can be exploited by all players.

Anyway, since the supply of resources was under control of the game operators, I presume that these effects can be corrected for (in a statistical sense) when estimating things like economic growth. It would be very interesting to see how much of the growth in economic activity in the game has come from people learning to play the game better (ie productivity increases) versus the ‘artificial’ growth due to increased population and increased resources. Inflation is also interesting. The game has a currency and I presume the supply of that is also under control. It would be interesting to see how changes in money supply affected inflation.

As I’ve said before, I think games like this are a very good way of studying economic phenomena. Economics is at a disadvantage compared to other sciences in that we can’t often run experiments to generate data and test our theories. Experimental economists do run experiments with subjects in a lab that try to mimic some particular economic situation. But these experiments are often very simplified versions of real situations, and there’s a question about whether the subjects take them seriously enough and behave as they would in the real world. With an online game, the players may have more incentive to take things seriously, since they care about doing well in the game. Of course the game still needs to be designed well to give people the right incentives to test any particular theory, but I think it’s a very promising area for economic research.

The creator of the Financial Next website asked me to take a look at his site. It’s a website that facilitates ‘prediction markets‘ with play money (ie not real money). This is not a new idea, for example the Iowa Electronic Markets have apparently been around since 1988. The basic idea is to create a virtual online market for a well-defined future event, for example ‘Hillary Clinton wins the 2008 US presidential election’. For a yes/no event like that, if you own a share in that idea, you get some payoff, say $100, if it turns out to be true, and nothing if it’s not true. How likely you think the event is will determine what you should pay for the share. If you think Hillary has an 80% chance of winning, then you should be willing to pay up to $80 for a share in that idea.

Aggregated over many people, the market price in such an idea converges on the overall ‘consensus’ opinion of all the traders in the market. Basically, markets are tools for extracting information. In this case we’re extracting people’s beliefs about the probability of some unknown future event. We could do the same thing by just taking a survey of people’s opinions. However, there’s some reasons why markets might generate more accurate results than surveys. First, if money is at stake, people might take the question more seriously and try to come up with an informed opinion about the issue in question. Second, it makes clear the distinction between “Do you want Hillary to win?” and “Do you think Hillary will win?”. There are probably other reasons why markets might outperform surveys, but those are the two that come to mind for me.

On the downside, it’s probably more expensive to run prediction markets than conducting surveys, and people have to be willing to spend more effort participating in them. You can answer a survey question in one minute, but a prediction market probably requires more intensive effort over a period of time. Thus it might be easier to gather the opinions of more people with surveys, compared to what could be achieved with prediction markets. I’m not sure whether surveys or prediction markets would win in a cost-benefit analysis of the tradeoff between cost of running the process and accuracy of the results.

In any case, as an economist I like the idea. The Financial Next site implements this pretty well and makes it easy for users to participate in markets, and even create their own markets. Since it’s just for play money, there’s no real harm done if people set up strange markets on the site. On the other hand, I wonder how seriously people take it when only play money is at stake. As the site says, the main motivation for participating in the site is fun and beating other people. So it’s a kind of game.

I think this is another interesting idea — using games to motivate people to participate in economic experiments. These days experimental economics is popular, and economists try to set up artificial situations with subjects in a lab to test various economic theories. One criticism of these is that the subjects are not really motivated enough and won’t behave as they would in a real situation. I think well-designed games (here I mean not the game theory type of game but the ‘fun’ type of game) may be able to help overcome this problem. If people enjoy playing a game, and have a stake in it, they may take it seriously, and if the game it set up well maybe we can test economic theories. In other words, give people a fun game as a carrot, but manipulate the environment in some way to run some subtle experiments. One online game, EVE, recently hired a real economist, and it seems like he’s having some of these same thoughts.

In terms of the Financial Next site, its main problem at the moment seems to be a lack of traders. Since it’s only for play money, people will only be motivated to join if the site provides them with some other kind of benefits aside from making money. The competitive/play motivation is fine, but that works best when there’s a large population of players. If I’m the best out of 10 players that’s not so impressive, but best out of 100,000 is something to be proud of. So Financial Next is another example of a network that will become more valuable to its members as it gets bigger. I’m not sure exactly how they can attract more users and reach some sort of ‘critical mass’, but I’d suggest emphasising the competitive aspect more and trying to make trading more ‘fun’ somehow.

The other problem with a lack of traders is that the market becomes quite ‘thin’. This means that its predictions won’t be so good, because they don’t aggregate the opinions of very many people. In addition, traders’ behaviour probably becomes somewhat strategic. In a small market with few traders, each of them has quite a lot of influence over the market price. This can affect players’ strategies, and may lead them not to trade in such a way that best reveals their estimates of the probability of the event that we’re interested in. In contrast, in a thicker market with many traders, each will assume that they can’t really affect the price, and will be more likely to trade according to their true estimate of the probability.